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ICICI Lombard General Insurance Company is the largest private-sector non-life insurer in India based on gross direct premium income (GDPI) for last fourteen straight years, after being one of the first few private-sector companies to commence operations in the sector in FY2002. The company was established as a joint venture between ICICI Bank - India's largest private sector bank in terms of consolidated total assets at Rs9.9 trillion end March 2017, and Fairfax Financial Holdings - Canadian based holding company which, through its subsidiaries, is engaged in property and casualty insurance and reinsurance and investment management with US$ 43.38 billion of total assets end December 2016.

The company has continued to grow faster than the industry, with GDPI growing at a CAGR of 26.7% from FY2015 to FY2017, as compared to a CAGR of 22.8% for the Indian non-life insurance industry in the same period. The company has gained market share, in terms of GDPI, from 7.9% in FY2015 to 8.4% in FY2017 and further higher to 10.0% in Q1 of FY2018.

Bhargav Dasgupta is Managing Director and CEO of the company for over eight years. He has over 25 years of experience in the insurance and banking sectors. Alok Kumar Agarwal and Sanjeev Mantri are executive directors of the company. The overall average work experience of senior management members (including executive directors) of the company is approximately 24 years.

The company offers a comprehensive and well-diversified range of products, including motor, health, crop/weather, fire, personal accident, marine, engineering and liability insurance, through multiple distribution channels. In FY2017, the company issued approximately 17.7 million policies and GDPI was Rs10725 crore, translating into a market share, on a GDPI basis, of 8.4% among all non-life insurers in India and 18.0% among private-sector non-life insurers in India. The company has issued approximately 5.2 million policies and GDPI was Rs3321 crore in Q1 of FY2018, translating into a market share, on a GDPI basis, among all non-life insurers in India of 10.0% and among private-sector non-life insurers in India of 20.2%.

The key distribution channels of the company includes direct sales, individual agents, bank partners, other corporate agents, brokers, and online, through which the company service its individual, corporate and government customers. The distribution network enables the company to reach customers in 618 out of 716 districts across India. As of end June 2017, the company had 6,528 employees and 20,775 individual agents, which are not employees.

The company has the largest total investment assets among the private-sector non-life insurers in India at Rs16446 crore with investment leverage, net of borrowings of 4.07x end June 2017. Annualised total portfolio return (including unrealised gains) was 13.0% for FY2017 and 14.4% for Q1 of FY2018. Listed equities made up 14.8% of total investment assets, by carrying value, end June 2017, which provided annualised total return of 30.8% since FY2004, as compared to an annualised return of 17.5% on the Nifty index.

The company takes a holistic approach to risk management, which includes a data-driven risk selection framework, conservative reserving and quality reinsurance. The company also works with customers to proactively analyse and mitigate risks, which benefits both its business and customers by reducing losses and the amount of claims.

The company is at the forefront of leveraging technology in the Indian non-life insurance industry, achieving efficiencies in internal operations. In FY2017, 87.5% of new policies were initiated electronically, either by distributors or customers. While number of policies grew at a cumulative annual growth rate of 13.1% between FY2015 and FY2017, the employee productivity, measured in terms of gross direct premium income per employee, increased from Rs1.14 crore in FY2015 to Rs1.66 crore in FY2017, representing a cumulative annual growth rate of 20.7%.

The company has an established track record of delivering annual returns to shareholders and its return on equity has exceeded 15.6% for each financial year since FY2015. Its profit after tax and return on equity were Rs642 crore and 17.2% in FY2017 and Rs 214 crore and 21.9% on an annualised basis in Q1 of FY2018. The company has a strong capital position with a solvency ratio of 2.13x as of end June 2017 compared to the IRDAI-prescribed control level of 1.50x. The company has paid cumulative dividends (exclusive of dividend distribution tax) of Rs414 crore since FY2015.

Indian Non-life insurance sector and future growth potential

The size of the Indian non-life insurance sector was Rs1.28 trillion on a GDPI basis end March 2017. Indian non-life insurance sector GDPI grew at a CAGR of 17.4% between FY2001 and FY2017. According to Swiss Re, India was fifteenth largest market in the world and the fourth largest market in Asia in 2016, behind China, Japan and South Korea. India was also amongst the fastest growing non-life insurance markets over 2011-2016, growing at 14.5% (as per Swiss Re). Despite its size and growth profile, India continues to be an underpenetrated market with a non-life insurance penetration of 0.77% in 2016, as compared to 1.81% in China, 1.70% in Thailand, 1.67% in Singapore and 1.62% in Malaysia and a global average of 2.81% in 2016. At US$13.2 in 2016, insurance density also remains significantly lower as compared to other developed and emerging market economies.

As of end March 2017, there were a total of 30 companies in the Indian non-life insurance sector. Besides these 30 companies, the state owned General Insurance Corporation of India (GIC) operates as the main Indian reinsurer. The Regulator has also allowed foreign reinsurers to set up branch offices in India which shall lead to an increase in the reinsurance capacity thereby increasing the market depth.

According to Crisil Research, GDPI for non-life insurers are projected to grow at 15-20% CAGR over FY2017 and FY2022. Improving economic growth, low insurance penetration, higher awareness of risk with higher disposable incomes, emergence of new risks such as cyber frauds and a strong regulatory focus on improving insurance coverage are expected be the key catalysts amongst others for this growth.

The Offer and the Objects

The company is coming out with the Initial Public Offering (IPO) and would be the first general insurer in India to list on exchanges. The offer comprises sale of up to 8,62,47,187 equity shares of the company, representing about 19% of its equity share capital for cash, through an offer for sale by ICICI Bank and FAL Corporation.

The Offer for Sale (OFS) is of up to 3,17,61,478 Equity Shares by ICICI Bank and up to 5,44,85,709 share by FAL. The entire proceeds from the OFS will be paid to selling shareholders. The OFS would mop up proceeds of Rs 5615 crore at the lower price band of Rs 651 per share (face value Rs 10 per share) and Rs 5701 crore at the upper band of Rs 661 per share.

The issue is to be made through a book building process and will open on 15 September 2017 and will close on 19 September 2017.

The objects of the offer are to achieve the benefits of listing the equity shares of the company on the stock exchanges. The listing of the equity shares will enhance the "ICICI Lombard" brand name and provide liquidity to the existing shareholders. The company will not receive any proceeds from the Offer.

To reward the ICICI Bank's existing share holders, the management has reserved up to 5% of ICICI Lombard General Insurance Company's shares for shareholders of ICICI Bank.

Competitive Strengths

Consistent market leadership and demonstrated growth: The company isthe largest private-sector non-life insurer in India, while it continue to grow faster than the industry with GDPI growing at a CAGR of 26.7% from FY2015 to FY2017 as compared to a CAGR of 22.8% for the Indian non-life insurance industry in the same period. The market share, by GDPI, increased 10% by June 2017. The company has also maintained a leadership position among private sector non-life insurer across product segments such as motor, health and personal accident, crop/weather, fire, engineering and marine insurance, since FY2015. A strong brand and partnerships with various stakeholders have contributed to this growth.

Diverse product line with multi-channel distribution network: The company has continued to reinforce its industry leadership by offering products and solutions that address the untapped and evolving needs of customers and established itself as a reliable one-stop insurer for diverse customer requirements. The company has a diversified composition of insurance products with motor, health and personal accident, crop/weather, fire, marine, and engineering insurance contributing 42.3%, 18.9%, 20.1%, 6.9%, 3.2% and 2.1%, respectively, of GDPI in FY2017. On customer profile front, the retail (including SME), corporate and government business groups contributed 60.4%, 17.5% and 22.1% of GDPI in FY2017.

The company distributes its products through 51 corporate agents, including promoter ICICI Bank providing access to its 4850 branches, 20775 individual agents and electronic platform, which generated 1.6 million policies in FY2017. The direct sales channel contributed 43.2% of GDPI in FY2017.

Delivering excellence in customer value: The company haspaid 92.2% of its motor own damage insurance claims and 99.3% of its health and personal accident insurance claims in FY2017 within 30 days, as compared to an Indian non-life private-sector average of 81.9% and 85.2%, respectively. The number of grievances received reduced from 5,704 in FY2015 to 3,515 in FY2017, despite the increase in number of policies written.

Robust risk selection and management framework: The company takes a holistic approach to risk management, which includes a data-driven risk selection framework, conservative reserving, and quality reinsurance. Its share of losses incurred from each catastrophic event since FY2013 has been in the range of 1.5%-6.2%, much lower than the market share 7.8% during the same time period. The company has been disclosing reserving triangles as part of its annual reports since FY2016.

Focus on investments in technology and innovation: The company isat the forefront of leveraging technology in the Indian non-life insurance industry. The company has integrated multiple distribution partners seamlessly with its systems and processes helping to increase efficiency in business. In FY2017, 87.5% of the total approximately 17.7 million policies were initiated electronically. This helped to improve employee productivity, measured in terms of GDPI per employee, from Rs1.14 crore in FY2015 to Rs1.66 crore in FY2017, representing a CAGR of 20.7%.

Strong investment returns on a diversified portfolio: The investment management philosophy of the company is to earn investment returns commensurate with the risks undertaken. The company has the largest total investment assets among the private-sector non-life insurers in India at Rs16446 crore end June 2017. The government securities account for 30.6% of total investment assets, by carrying value, corporate bonds at 43.5%, equities at 15.7%, and other investments for the remaining end June 2017. The investment leverage, net of borrowings, has increased from 3.54x in FY2015 to 4.07x as of June 30, 2017, despite net worth rising 35.8% over the same period.

Superior operating and financial performance: The company has a strong capital position with a solvency ratio of 2.10x end March 2017 compared to the IRDAI-prescribed control level of 1.50x, and an Indian non-life private-sector average of 1.95x. The combined ratio has been generally stable, improving from 104.9% in FY2015 to 104.1% in FY2017. During the same time period, the loss ratio improved from 81.4% to 80.6%. The combined ratio and loss ratio improved to 102.4% and 78.1% in Q1 of FY2018. The company has provided return on equity in excess of 15.6% from FY2015.

Key Risks

Catastrophic events, including natural disasters, could materially increase liabilities for claims by policyholders, result in losses in investment portfolios, and have a material adverse effect on business, financial condition and results of operations. The fire, engineering, crop/weather, motor and health insurance businesses exposes to risks of liabilities for insurance claim payments relating to catastrophic events covered by insurance products of the company.

The loss reserves of the company are based on estimates as to future claims liabilities and if they prove inadequate, it could lead to further reserve additions and materially adversely affect results of operations.

A significant portion of business comes from working with the government which subjects the company to risks which could result in litigation, penalties and sanctions including early termination, suspension and removal from the approved panel of insurers. In FY2017 and Q1 of FY2018, about 22.1% and 22.5% of GDPI was derived from central and state government contracts/programmes, respectively, in relation to crop/weather, mass health and mass personal accident insurance.

A significant proportion of GDPI is derived from sales to the customers of agents/intermediaries affiliated with motor vehicle manufacturers (MVMs). ICICI Bank accounted for 6.0% of GDPI in FY2017. The reliance of the company on motor vehicle manufacturers and ICICI Bank and other key distribution partners subjects the company to a concentration risk, and the termination of, or any adverse change to, relationships with motor vehicle manufacturers and ICICI Bank and such other key distribution partners, or their performance, may have a material adverse effect on business, financial condition, results of operations and prospects.

In FY2017, motor insurance, crop/weather insurance and health insurance accounted for 42.3%, 20.1% and 15.5% of GDPI, respectively. The company relies on selected types of insurance for most of its GDPI and profitability. Any constraint in selling these products due to future regulatory changes restricting or limiting the sale or marketing of these products, changes in customer preference, or if the company is unable to maintain the right portfolio mix of profitable products, could have a material adverse effect on business, financial condition, results of operations and prospects.

The company cedes a significant percentage of its reinsurance to GIC Re. Any adverse change in relationship with GIC Re could result in a material adverse effect on business and results of operations. In FY2017, 67.0% of reinsurance ceded was ceded to GIC Re. For certain types of reinsurance, including crop/weather insurance, all non-life insurers in India rely largely on GIC Re.

The company is exposed to significant market risk, including changes in interest rates or adverse movements in the equity markets in India that could impair the value of investment portfolio and have a material adverse effect on business, financial condition and results of operations.

A portion of corporate premium comes from a limited number of large clients and the loss or downsizing of any of these clients could adversely affect business, results of operation, financial condition and cash flows. The company has historically derived and continued to derive a certain portion of corporate premium from a limited number of large clients, while expect that a certain portion of corporate premium will continue to be derived from a limited number of clients in the future. In FY2017, premium received from top five clients and top 10 clients accounted for 4.9% and 5.7% of GDPI, respectively.

The states of Maharashtra, Madhya Pradesh and Delhi, accounted for 47.6% of GDPI in FY2017 combined. As a significant portion of business is generated from relatively few regions, the company is susceptible to economic and other trends and developments, including adverse weather conditions, in these areas.

Valuation

ICICI Lombard General Insurance Company is first general insurance company in India to list on the exchange. The company has continued to record healthy earning performance, while growing faster than the industry. The company has maintained the industry leadership across various segment and products. The GDPI of the company has grown at healthy CAGR of 26.7% from FY2015 to FY2017, as compared to a CAGR of 22.8% for the Indian non-life insurance industry.

Fairfax Financial Holdings on 27 May 2017 sold 12.18% of its stake in the company to private equity firms Warburg Pincus, Clermont Group and IIFL Special Opportunities Fund for Rs 2473 crore valuing the firm at Rs 20303 crore.

ICICI Lombard's EPS for Q1 of FY2018 works out to Rs 18.89 (on annualized basis) and FY2017 works out to Rs 14.14. The scrip is offered at P/E multiple of 34.5 times Q1 of FY2018 EPS at the lower price band of Rs 651 per share and 35 times Q1 of FY2018 EPS at the higher price band of Rs 661 per share. P/E multiple stands at 46 times FY2017 EPS at the lower price band and 46.8 times FY2017 EPS at the higher price band .

The book value (BV) of ICICI Lombard is Rs 86.4 end June 2017. P/BV works out to 7.65 times at the upper price band of Rs 661 per share.

The company has a strong capital position, with a solvency ratio of 213% end June 2017, compared to the IRDAI-prescribed control level of 150%. India continues to be an underpenetrated market with a non-life insurance penetration of only 0.77% in 2016 as compared a global average of 2.81% in 2016. The untapped opportunity in general insurance provides ample scope for the company to grow its business.